Sunday, April 08, 2007

Personal money management

When it comes to money, Warren Buffett knows all about it. Who is Warren Buffett? He is the billionaire with an amazing long-term success in business and investing. This intriguing gentleman lives in Omaha, Nebraska, far from the financial centers like New York. His record is the stuff of legend. So when he speaks, thousands of his admirers listen. Every year, thousands of Berkshire Hathaway shareholders flock to Omaha to listen to Warren. There isn’t any listed companies which can draw its shareholders in such a charming way and on such scale.

Late last year, Warren was profiled in an hour-long TV program. Just before the interview ended, he was asked if he had any closing words of advice. He said, “Educate yourself and stay away from credit cards.” It sounds simple but yet so profound.

Education is critical. There’re thousands of mutual funds, exotic investments, confusing terms, hidden fees, and risky strategies that are not suitable for many investors. Investors need to keep their eyes and ears wide open, ask intelligent and informed questions, and carefully evaluate the investment opportunities.

Credit cards make it extremely convenient to buy small and big-ticket items. But easy credit leads to easy spending – causing a false sense of security by deferring today to tomorrow. Credit card balances can gradually increase and become unmanageable if it isn’t tracked properly.

It is in human nature to do things we like and avoid things we don’t like. Going out on Friday nights? Shopping as a social activity? It is easy to find reasons to keep the habits that we like that often lead us to trouble in the future. But are your financial habits working for you or against you? The simple test is if you feel your paycheck is cut by say 10% the next month, and you’ll get into a cash flow problem, then you’ve lots to think about.

A few questions you should ask.

1) Do you save money every month?
2) Do you have enough money in an emergency fund to pay for three to six months of living expenses?
3) Do you pay off your credit card balances in full each month?
4) Are you happy with the amount of money you have in savings? Is it increasing or depleting?

Ultimately, the question is if you keep following your current financial habits, where will you be in say 10 years time?

The difference between long-term financial success and financial frustration is often not that great. It lies in a fundamentally flawed human nature – a lack of discipline. Usually all it takes is some fine-tuning, not a complete overhaul by reinventing the wheel.

Taking the first step out of the usual boundaries one is always in is the hardest step to make. However, understanding and modifying the wrong to the right can and will reap huge payoffs. Try doing this.

1) For one month, track all the money you spend.
2) Ask yourself: “What else would this money buy?”
3) For everything that you buy on impulse or splurge, ask yourself: “How long will the satisfaction or happiness last?”
4) Modify some spending so you can increase your savings.

If you really want to make progress, unfortunately, this is the only way unless you know how to print endless money. Create a written spending plan as this helps you understand the impact of all of your spending choices and know where you’re choosing to spend your money.

Managing money can be challenging. Even people with good incomes sometimes wonder “Why isn’t this working?” “Why aren’t we able to save more?” “Does life always have to be this way?” The heart to financial success is to have a clear plan and to spend less than you earn.

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